China's Development Strategy and the Global Financial Crisis

The global financial crisis preoccupying the United States and Europe has led policymakers, development specialists, and investors to look to China. They are not so much seeking the panacea for financial troubles or a resolution over internal debates on the actual substance of what most agree are necessary financial regulations. Rather, they are perplexed by the new East Asian economic miracle in the context of neoliberal ascendance and integrated financial markets, on the one hand, and China's 1978 open door policy and ensuing economic reforms, on the other hand. Relatedly, these observers are concerned about Beijing's responses to the financial crisis now that China is an important part of the global economy. The two very enlightening books reviewed in this essay join the growing scholarship in understanding how the Chinese economy has managed to eschew the ills of both state interventionism and neoliberalism and whether what China has achieved is sustainable in the post-2008 financial crisis era.

In many ways these two books complement each other, as the subject relevance and time frames under focus are sequential. In Demystifying the Chinese Economy, Justin Lin, senior vice president and chief economist at the World Bank, asks why the Chinese economy fared so well in the Middle Ages, faltered during much of the 19th and 20th centuries, and gained resurgence near the end of the 20th century. Nicholas Lardy, an economist and long-time China watcher at the Peterson Institute for International Economics, in Sustaining China's Economic Growth after the Global Financial Crisis, focuses on 21st-century China in the aftermath of the worst global economic environment since the Great Depression.

According to Lin, from pre-modern times to the Middle Ages, China prospered due to the experiences of trial and error that enhanced the probability of invention inherent in conquest and territorial expansion. China began to lag behind Europe during the Industrial Revolution when controlled experiments accelerated innovation. China sought to catch up under Mao Zedong by borrowing heavily from the Soviet model of prioritizing heavy industries. "From the perspective of the national interest," this strategy necessitated "distorted prices of factors and products, highly centralized and planned allocation of resources, and powerless managers at the micro level" (p. 80). This approach became problematic, however; for example, compulsory cooperative membership made idleness and freeloading the most rational option for workers, leading to the devastating famine that followed the Great Leap Forward.

In the post-1978 era, the liberalization of private entry in labor-intensive industrial sectors consistent with China's comparative advantage allowed the country to enhance its technological infrastructural base. "The development objective should be to upgrade the endowment structure, not the industrial and technological structure," as the traditional catching-up strategy advocates, so that a country can maximize "the expected profitability of a company" and "the competitiveness of a product or an industry in an open competitive market" (p. 117). In other words, China's "comparative advantage-following catch-up strategy" (CAF) sped up capital accumulation, upgraded the factor endowment structure (including a unified national market and physical infrastructure), and accelerated economic growth. An important difference between China today and Japan, Taiwan, and South Korea during comparable stages of development is that the extent and scope of FDI in China, particularly in the industries where China possesses a comparative advantage, far exceed what were permitted by China's East Asian neighbors.¹

At the World Bank, Lin has advocated CAF as a revision to earlier generations of structural theories, which touted a "comparative advantage-defying catch-up strategy" (CAD).² China's experience certainly lends credibility to CAF, given developing countries' limited resources and relative backwardness. The full scope of economic reform in post-1978 China, however, does not fall neatly within the CAF strategy. Lin emphasizes how China has achieved unprecedented economic growth and social stability through upgrading its infrastructure and...